The Money View

Maynard's Revenge: A Review

Below is a revised version of a talk I gave at the New School University, at a conference to launch Lance Taylor's latest book. The date of the event was April 28, 2011, more than a year ago, and the delay in revision was entirely my fault--overcommitment and pressing deadlines on many fronts. Sorry about that.

In the Preface, Lance tells us that he has written this book with two audiences in mind. I think of myself as falling into his first group: “people who are willing to put their feet up on the table, nose to the grindstone, and so on and think about how Keynes and his closest followers did macroeconomics.” I love the image--both feet up and nose to the grindstone, at the same time! I would like to stipulate that I read the book this morning sitting in my favorite easy chair (feet up), but starting at 5am sharp (grindstone).

The central theme of the book is that Keynes and his fellow travelers or “OId Believers” (another pregnant image), were “correct about how to do macroeconomics”, which is to say they were methodologically on the right track. The biggest thing they were right about was the importance of blending both history and equilibrium or “thinking in historical and logical time” (as Joan Robinson put it). The reason this is so important is that the economy itself is a constantly changing and evolving entity, which means that individuals face epistemic problems of uncertainty, not just risk. In a world like that, historico-institutional methods provide a kind of knowledge that mathematico-statistical methods simply cannot, knowledge to inform individual decisions but also social policy.

Concretely, the way Keynes blended the two methodological approaches was by building his theoretical structure on the solid foundation of the National Income and Product Accounts, whose development he played some role in stimulating. The accounting framework gives us a picture of the economy as a whole, and macroeconomic theories are essentially about how various elements of that accounting framework fit together, in a system of mutual causation. Keynes little pamphlet “How to Pay for the War” is perhaps the epitome of this kind of approach.

The Old Believers who built on Keynes used the same method, but with a progressively widening accounting basis, extending from NIPA to Flow of Funds (Copeland 1952) and Wynne Godley’s Stock-Flow Consistent accounting (Ch. 5), and then on to global balance of payments and net foreign assets accounting (Ch. 8). Corresponding to these extensions of the accounting basis are extensions of macroeconomic theory, most importantly extensions to money and finance in the work of Minsky and Kindleberger.

The virtues of starting with the accounts are never spelled out explicitly but they seem to be two. First, the approach provides a tether that keeps our thinking in tight connection with the real world, but not too tight a tether since, and this is the second virtue, it permits (even encourages) a rather open theoretical space in which a range of insights can flourish simultaneously. In this respect I note the repeated emphasis in Ch. 8 that we have a number of plausible stories about what determines exchange rates, so we must pick and choose among them which one yields the most insight at any particular moment. Exchange rates are “overdetermined” by our theories, Lance says, and this seems to be the flip side of the fact that our theories are “underdetermined” by the underlying accounting frameworks. The resulting open economics is a good thing.

There is a lot to like about this approach to macro. We need look no farther than Lance’s own work to appreciate its flexibility and utility. His Structuralist Macroeconomics (1983) is clearly an attempt to find the right blend between historico-institutionalist and mathematico-statistical method, and it clearly works. Indeed, I appreciate it more today that when I first encountered it. I admit to not quite understanding what Lance was up to when I first came into contact with his work as a graduate student twenty five years ago.

Indeed, what Lance identifies as the characteristic methodological moves of Keynes seem to me more descriptive of Lance’s own work than of Keynes himself. But Lance is certainly not the first person to look at Keynes and see himself! (Minsky does much the same in his John Maynard Keynes.) As a sometime historian of thought and intellectual biographer, if I were asked to characterize how Keynes did macro, I would put more emphasis on the man of affairs—both statesman (as Economic Consequences of the Peace) and speculator (as partner with Oswald “Foxy” Falk in the Syndicate)—learning by doing in the first place, and only later trying to formulate what he had learned in the language of academic economics, as a way of communicating to others. Just so, I read the Tract on Monetary Reform not so much as a an attempt to build on the quantity theory tradition, and more as a struggle to express ideas that came from somewhere else using existing acceptable language.

Contra Lance, I also do not read Keynes as very much of a NIPA theorist—that’s another projection of Lance, who is clearly a real side macroeconomist in his bones. Lance plots the price of goods against the price of assets and it is clear which he thinks is the more reliable index of economic reality; part of his difficulty with the exchange rate is that it is at the same time both a goods price (as PPP) and an asset price (as UIP). Here is Lance at the end of the book, commenting on the road ahead after the crisis: “The real policy challenge in this area is to build a firewall between finance and the real economy so as to shield the rest of us from the bankers’ excesses.”

Now, Keynes of course famously distinguished between speculation and enterprise in the General Theory, but I think he lived too much in the world of speculation ever to imagine that Lance’s firewall could hold. Minsky’s financial Keynes is a projection of Minsky’s own theory onto the great man, but it captures a side of Keynes that is not visible if we see him through NIPA lenses. Had the Flow of Funds accounts been available earlier, the course of macroeconomics might have been different—and that different course is still available to us.

Lance’s Keynes is more Taylor than Keynes in another respect as well, namely his emphasis on the centrality of distributional concerns for macroeconomics. Richard Goodwin’s celebrated predator-prey model of the class struggle is not very Keynesian, but it is very Taylorian. Similarly, Lance’s lifelong concern to find a macroeconomics that is relevant for the problems of the Third World comes from a sense of the importance of distributional concerns between nations as well as between classes. Keynes, by contrast, in his policy contributions was arguably more focused on prolonging and propping up what remained of the dying British Empire.

But these are quibbles. Keynes remains an attractive exemplar of how to do macroeconomics, and not just because of his repeated deep insights into the problems of his own day. One of the main sources of attraction is by contrast with other economists, both before and after Keynes’ own day. Lance does not have a high opinion, shall we say, of most of what passes for macroeconomics. He sees it as either nothing more than playing games with models, or nothing less than apologetics for neoliberal political trends. Modern finance in particular comes under sustained assault as “an intellectual elixir for deregulation and the proliferation of exotic financial instruments that led into the boom and crash.”

From this perspective, the global financial crisis presents itself primarily as a reality check. The world is not as free market macroeconomics would have us believe. It is in fact more as structuralist macroeconomics would have us believe. Maynard Keynes’ Revenge is also Lance Taylor’s Revenge.